What general valuation approaches are important to credit analysis (asset management)?
For an interview I'm reviewing (among other things) the three broad methods and when to prefer one over another:
- Income-based/DCF (discounting FCFF by WACC, probably going to ignore Cap Earnings in time interest of time)
- Market-based (P/E, P/Sales, P/CF, EV/EBITDA, EV/Sales comaparables)
- Asset-based (BV, liquidation value)
Are these all roughly on the right track? Can someone also help me roughly outline when you'd prioritize one over the other; I only know:
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For HY/distress asset-based is more important since liquidation won't really come into play in IG
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DCFs on negative-CF companies is allowed
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Multiples is probably less relevant to credit than other use cases like equity since so many of the metrics involve (equity) market numbers
Generally on the right track - But would caution you on EV multiples as these are still looked at to understand what type of cushion I have in different tranches of debt vs the equity (as an example) as well as against historical leverage at the issuer and management targets / covenants.
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